An independent insurance agent has many reasons to work with a managing general agent, or MGA. From the requirement of expertise to the availability of a particular product or the competitive price, MGAs provide a variety of services and competitive advantages to independent agents. In fact, Insurance Journal argues there are at least 50 possible reasons for partnering up with an MGA. To get a better understanding of how the managing general agency business model works, and how to benefit from working with an MGA, let's first look at what precisely a managing general agent does.
What is a Managing General Agency?
The Intermational Risk Management Institute (IRMI) has a straightforward definition for managing general agent: "a specialized type of insurance agent/broker that, unlike traditional agents/brokers, is vested with underwriting authority from an insurer.” As an agency, an MGA has granted authority to perform specific functions that are ordinarily handled only by insurers. Such duties include binding coverage, underwriting and pricing, appointing retail agents within a particular area, and settling claims. As noted by William Harger, an insurance and reinsurance arbitrator, “the range of authority given to an MGA can be very narrow or broad, depending on the needs of the insurer.” In any case, an MGA acts as an intermediary between carriers and independent agents and / or the customer. MGAs comprise one of the fastest-growing segments of the insurance industry. According to a study by global investment management firm Conning, the MGA and program market growth in 2016 exceeded that of the total property and casualty market by 32 percent.
The Managing General Agent and its Role in the Insurance Industry’s Ecosystem
Kyle Nakatsuji, a principal at American Family Venture, provides an excellent overview of the ecosystem in the insurance industry. There exist four insurance distribution models: lead generation, agency, MGA and carrier. Each group is distinguished by the amount of insurance risk they bear and the controlling authority they have over a transaction. Most MGAs have the authority to underwrite and quote. Some also handle loss control and claims for insurers with whom they have an affiliate relationship. As Bizfluent writes: “MGAs are generally entitled to a contingency commission, or override, on all business written within their territory. They will take a percentage of the commission that would otherwise go to the producing insurance agent.” If an MGA has “skin in the game,” or a risk-sharing function, they also participate in underwriting profit or loss. There is a difference between a program administrator and an agency with binding authority. In the former case, an MGA can underwrite, rate, quote, bind, issue and service policies. According to Victoria Webb, the MGA is, in fact, the carrier bearing the profit and loss that comes from underwriting. When an MGA only has binding authority, it is the insurer who does the underwriting job. The insurer can also cancel a policy when they review the risk after binding.
The Two Managing General Agent Business Models
An MGA can be used in any line of insurance for any form of insurers. According to the American Association of Managing General Agents, this includes insurers who are "admitted or not, direct or otherwise, broker or agent system, contract/appoint or open-broker sub production, or any or all combination of these." At the Insurance Journal, Dan Fash argues that MGAs have certain competitive advantages in the industry, and those advantages tend to be levered via one of two common business models, which are either niche or general. Let’s take a look at each model.
Specialized Managing General Agents
Traditionally, an MGA enters the market with specialty coverages. They have the expertise or distribution channels to reach a niche insurance segment. When a carrier wants to insure a specific risk or entity in that niche but doesn’t own the requisite underwriting expertise, the carrier partners with a specialized MGA to establish underwriting guidelines and roles in the customer experience. The two parties share risk and responsibilities for claims and services. Some insurance classes are not good fits for big insurers, who then choose not to invest in the knowledge and expertise to underwrite such cases. By catering for such market, an MGA can create competitive advantages. As Tony Campisi, president and CEO of Glatfelter Insurance Group, puts it: "There is room for specialization in virtually every area of our business. Where the general market isn't as responsive, MGAs can differentiate themselves and bring significant value.” The traditional MGA model is known for its lean operation and ability to underwrite niche lines of business. Often supported by technology advances, these nimble MGAs can also offer access to new business through alternative distribution channels.
Diversified Managing General Agents
According to John Holm, an MGA executive with 30 years of experience in corporate banking, there are new kids on the block when it comes to MGAs. “A new breed of generalist/multi-class MGAs are beginning to appear on the scene. These vary from small-scale ‘app’ driven MGAs to large-scale, diversified players targeting generalist business.” These general MGAs don’t target niche markets. They are larger and more diversified players that offer independent agents access to many carriers. Their systems often integrate the latest technology in the insurance industry to provide efficient operation and low distribution costs. Through these efficiencies, they encourage new forms of partnership with insurers, says Steve Weberson, head of insurance research at Conning.
How a Managing General Agent Can Help Independent Agents
When working with an MGA, either specialized or diversified, independent agents realize certain key benefits:
- Access: When working with MGAs, independent agents gain access to market and carriers that would be difficult for them to gain on their own.
- Efficiency: MGAs are often smaller businesses than carriers, which allows them to stay agile and responsive. There are few, if any, barriers to communication between an MGA and the insurers or reinsurers they partner with. Thus, independent agents can benefit from this lean operation to serve their clients more efficiently.
- Technology: Cory Crosland argues that MGAs can offer digital products to speed up the quote process as well as online platforms that integrate with wholesale channels. Therefore, MGAs not only help independent agents provide better services to their clients but also work seamlessly with insurers.
- Higher commissions: By working with a diversified MGA who has established relationships with a network of different carriers, agents will be able to review the commission structure and have the option to sell products from carriers that offer the best rates. That means higher commissions for the same amount of work.
- Continued independence: An MGA partnership can introduce knowledge, efficiencies and technology that will help independent agents better serve their customers, but the agent need not sacrifice independence to secure these advantages.
By working with a managing general agency, then, independent agents retain the flexibility that engenders trust among their customers. They remain independent in choosing the providers they want to work with and the workflows that fit their business.